Menu Close

Why Use a Solo 401K Plan over a Self-Directed IRA?

The determination of the type of retirement plan one should select is an important decision. The decision becomes much easier when one is self-employed. A Solo 401(k) is perfect for sole proprietors, small businesses and independent contractors such as consultants. A Solo 401K plan offers the same advantages as a Self Directed IRA LLC, but without having to hire a custodian or create an LLC.

The Solo 401(k) plan is unique and so popular because it is designed explicitly for small, owner only business. There are many features of the Solo 401(k) plan that make it so appealing and popular among self employed business owners.

There are a number of significant advantages of establishing a Solo 401K over a self directed IRA.

The first major advantage of a 401K or Solo 401K plan over an IRA is in the area of annual contributions. While an IRA only allows a $5,000 contribution limit (with a $1,000 additional “catch up” contribution for those over age 50), a plan participant of a 401K or Solo 401K Plan can make annual contributions up to $50,000 annually with an additional $5,500 catch up contribution for those over age 50.

The second major advantage of a Solo 401K or Solo 401K plan over an IRA is the ability to borrow retirement funds tax and penalty free. While an IRA offers no participant loan feature, the Solo 401k Plan allows plan participants to borrow up to $50,000 or 50% of their account value (whichever is less) for any purpose, including paying credit card bills, mortgage payments, personal or business investments, a car, vacation, or anything else. The loan has to be paid back over a five year period at least quarterly at a minimum prime interest rate (you have the option of selecting a higher interest rate).

The Third major advantage of a Solo 401K over an IRA is that unlike an IRA, Roth IRA or Self Directed IRA, with a Self Directed 401K Plan, the 401K bank account can be opened at any local bank or credit union. This benefit allows the Plan Participant (you) to serve in the trustee role. This means that all assets of the 401(k) trust are under the sole authority of the Solo 401k participant. A Solo 401(k) plan allows you to eliminate the expense and delays associated with an IRA custodian, enabling you to act quickly when the right investment opportunity presents itself. Making a Solo 401K Plan investment is as simple as writing a check.

The fourth major advantage of a Solo 401K over an IRA is that with a Roth Solo 401k, up to $22,500 can be contributed to an after-tax (Roth) account, whereas, only allows for up to $6,000 of Roth contributions (for individuals over the age of 50). In addition, in the case of a Roth IRA or a Self Directed Roth IRA, those who earn high incomes are disallowed from contributing to a Roth IRA or, in most years, converting their IRA to a Roth IRA. The Solo 401(k) plan contains a built in Roth sub-account which can be contributed to without any income restrictions.

The fifth major advantage of a Solo 401K over an IRA is that a Solo 401K plan is easy to administer. There is generally no annual filing requirement unless your solo 401(k) Plan exceeds $250,000 in assets, in which case you will need to file a short information return with the IRS (Form 5500-EZ).

The sixth major advantage of a Solo 401K over an IRA is that for those looking to purchase real estate with their retirement funds, using a 401K or individual 401K Plan will allow one to borrow non-recourse funds for the real estate acquisition and not be subject to any Unrelated Debt Financed Income (UDFI) or Unrelated Business Taxable Income (UBTI or UBIT). Solo 401K and UDFI

To learn more about the Self Directed IRA and Solo 401K retirement solutions, please contact a retirement expert at 800-472-0646 or visit

Share the knowledge
Posted in Solo 401(k)

Leave a Reply